Government cutbacks could wipe out 25 per cent of charities

Sector faces disaster as contracts for public funding come to an end

One in four large charities could find themselves at a "financial cliff edge" next year when public sector cuts begin to bite, according to research published by the Charity Commission.

Numerous service contracts between charities and public sector bodies will end in March 2011, with devastating effects for many charities, according to Dame Suzi Leather, the commission's chair. Research into more than 1,000 charities found that 59 per cent have now been affected by the economic downturn, compared to just 38 per cent in September 2008.

The findings come after a study carried out last month predicted that many charities will go "bust" because of their reliance on government contracts to deliver public services.

Larger charities have been hit hardest, with 79 per cent feeling the impact of the recession and a third seeing an increase in demand for services. These charities, with incomes of more than £100,000, are also more likely to predict a decrease in income than small and medium charities, with 28 per cent anticipating a drop in funds.

The Commission's latest Economic Survey of Charities also found that almost a quarter of the large charities consider public sector funding to be their most important source of income. Almost one in five (18 per cent) of charities had already seen a drop in public sector grants and contracts over the past six months. More than one in four (27 per cent) was anticipating a fall in the next 12 months.

However, 84 per cent of charities said they were optimistic about the outlook for the next year, up from 69 per cent six months ago. Dame Suzi warned that this new found optimism could be misplaced. "Clearly, severe cuts lie ahead in both local and central government resources; many local authorities are already identifying spending on the voluntary sector as being vulnerable," she said.

"There is a real concern that charities which receive money from the public purse to fund their valuable work could find themselves at a financial cliff edge in March 2011. This suggests that the high levels of optimism displayed by the charities we spoke to may be misplaced.

"Optimism is, of course, very important, but it must be matched by a recognition of the reality of the financial situation. We want trustees to channel their formidable energy into doing all they can to protect the valuable work of their charity. Despite what we may be seeing in other areas of the economy, our research shows that the financial recovery for charities may lag behind that of other sectors."

The study is the fourth survey conducted by the commission to track the continuing effect of the recession on charities in England and Wales. After speaking to 1,010 charities, the survey carried out by MVA Consultancy found that almost one in three charities had experienced a decline in their fundraising income over the past six months. One in eight (12 per cent) reported a rise in fundraising while 56 per cent reported no change.

The survey also found that more charities have been forced to draw on their reserves as the downturn drags on. One in eight charities (12 per cent) had done this compared to just 6 per cent in February last year. There was also a slight increase in the number of charities delaying plans to invest in projects.

Ann Blackmore, head of campaigns at the National Council for Voluntary Organisations, described the picture painted by the study as "very worrying". She said: "This is a worrying time for the voluntary sector. As we know many charities will be affected by the impending public sector cuts. We are urging charities to diversify their funding sources wherever possible to reduce risk. We are also calling on both local and central government to make necessary cuts in a coordinated and proper way so charities, their employees and their beneficiaries are not suddenly cut off."

Earlier research has already concluded that charities will be hit hard by public sector cuts. Earlier this month, a BBC survey of 150 council chief executives found that of the 62 councils which responded, 32 identified the funding of voluntary organisations as vulnerable. Last month, a study carried out by Cardiff University's school of social sciences on behalf of the public services union Unison predicted that many charities will go "bust". More than half of charities' income now comes from government contracts to deliver public services, it concluded. The sector is also a large employer, with 464,000 full-time staff.

Funding cuts: How charities are affected

A small domestic violence charity could be closed after losing half of its council funding. Island Women's Refuge saw its funding cut by £147,000 after councillors agreed to slash the £2.7m used to help vulnerable people on the Isle of Wight, as part of plans to save £11m from the authority's budget.

The funding, previously ringfenced to support vulnerable people, is to be reinvested in other services.

Fiona Gwinnett, the charity's chief executive, says the cut will make it impossible to continue providing information, advice and support to victims of domestic violence. "In effect it has the power to wipe out an organisation of 20 years' standing," she said. "Last year we were able to support 502 victims. It could also mean the charity will no longer be able to run the refuge. It will be a terrible loss. My team has 50 years of specialist experience between them. We will try to keep things going, but without core funding it will be very difficult."

Meanwhile Jo Swinhoe, director of fundraising at the Alzheimer's Society, said the charity's public sector funding had fallen by up to 20 per cent in the last financial year.

"We have not been immune from the impact of the economic downturn. Alzheimer's Society, unlike many other charities, does not rely primarily on public sector contracts for its income. Thanks to excellent fundraising and the tireless work of volunteers and staff we have actually been able to grow as a charity by 70 per cent over the past five years.

"Public sector funding has reduced by around 15 to 20 per cent in the last financial year and local authorities, health boards and primary care trusts will face difficult decisions as contracts come up for renewal.

"With the number of people with dementia expected to hit a million within a generation, we need to make sure that commissioning bodies continue to see it as a priority."

Why do some charities rely on public money?

Q. What is a charity?

A. A charity is a particular type of voluntary organisation – one that takes a distinctive legal form and has a special tax status. In the UK today there are probably more than 500,000 voluntary organisations, but fewer than 200,000 of these are registered charities. Most registered charities are not big household names. More than 85 per cent of charities have a budget of £100,000 or less and 56 per cent have a budget of £10,000 or less.

Q. Where do charities get their money from?

A. Charities' income stems from a variety of sources, including donations from the public, charitable trusts and foundations, companies and the National Lottery. Money is also earned through fundraising, legacies and the sale of donated goods. Everything else comes from rent, investments, trading fees and contracts, as well as grants received from public bodies.

Q. Why do some charities rely on public sector grants and contracts?

A. Large charities are more likely to rely on public sector grants and contracts than smaller organisations. One in four charities with incomes of £100,000 or more have said that the public sector is their most important source of funding, but only one in seven receives anything at all from the public sector purse.

Small charities are more likely to rely on fundraising from the public, with 30 per cent describing it as their most important source of income. The trend towards contracts is a direct result of government policies which encouraged charities to become increasingly involved in providing public services.

Research by the National Council for Voluntary Organisations found that income earned by charities through service contracts and sales of goods rose by 5 per cent to a record £17bn in 2006-07, accounting for 51 per cent of the sector's total revenue. Meanwhile, the proportion of income from voluntary donations and grants shrunk to 41 per cent of its total revenue.

Q. What do they spend it on?

A. On average, 80p of every £1 generated by a UK charity is spent directly on achieving its objectives, with 20p spent on operating and administration costs as well as future fundraising activity.